Contents. Capital and Risk Management Pillar 3 Disclosures at 31 December 2014

Transcription

1 HSBC Bank plc Capital and Risk Management Pillar 3 Disclosures at 31 December 2014

2 Presentation of information This document comprises the Capital and Risk Management Pillar 3 Disclosures as at 31 December 2014 ( Pillar 3 Disclosures 2014 ) for HSBC Bank plc ( the bank ) and its subsidiary undertakings (together the group ). Its principal purpose is to meet regulatory disclosure requirements under European legislation (chiefly CRD IV) and PRA rules/uk legislation. References to either HSBC or the Group within this document mean HSBC Holdings plc together with its subsidiaries. Cautionary statement regarding forward-looking statements These Pillar 3 Disclosures 2014 contain certain forwardlooking statements with respect to the financial condition, results of operations and business of the group. Statements that are not historical facts, including statements about beliefs and expectations, are forwardlooking statements. Words such as expects, anticipates, intends, plans, believes, seeks, estimates, potential and reasonably possible, variations of these words and similar expressions are intended to identify forward-looking statements. These statements are based on current plans, estimates and projections, and therefore undue reliance should not be placed on them. Forward-looking statements speak only as of the date they are made. The bank makes no commitment to revise or update any forward-looking statements to reflect events or circumstances occurring or existing after the date of any forward-looking statements. Written and/or oral forward-looking statements may also be made in the periodic reports to the US Securities and Exchange Commission, summary financial statements to shareholders, proxy statements, offering circulars and prospectuses, press releases and other written materials, and in oral statements made to third parties (including financial analysts) by Directors, officers or employees of HSBC or the group. Forward-looking statements involve inherent risks and uncertainties. Readers are cautioned that a number of factors could cause actual results to differ, in some instances materially, from those anticipated or implied in any forward-looking statement. These factors include changes in general economic conditions in the markets in which we operate, changes in government policy and regulation and factors specific to the group. Verification The Pillar 3 Disclosures 2014 have been verified internally but have not been audited by the group s external auditor. Frequency The bank publishes its Pillar 3 disclosures annually in accordance with Article 433 of CRD IV Capital Requirements Regulation ( CRR ). Media and location The HSBC Holdings plc Pillar 3 Disclosures 2014 and other information on the Group are available on HSBC s investor relations website: Contents Introduction 2 Regulatory framework for disclosures 2 Regulatory developments - capital buffers 2 Other regulatory developments 3 Pillar 3 disclosures Comparison with HSBC Bank plc Accounts Capital and Risk 3 Capital management 3 Pillar 1 3 Consolidation basis 4 Regulatory capital 5 Credit risk 7 Overview 7 Credit risk mitigation 15 Counterparty credit risk 18 Market risk 19 Operational risk 19 Internal assessment of capital adequacy 19 Overview 19 Credit, market and operational risk 20 Interest rate risk in the banking book 20 Insurance risk 20 Pension risk 20 Liquidity risk 21 Structural foreign exchange risk 21 Residual risk 21 Reputational risk 21 Business risk 21 Scenario analysis and stress testing 22 Remuneration 22 Main features of CET1, AT1 and T2 instruments issued by the group 24 Appendices 26 I Transitional own funds disclosure 26 II Glossary 28 1

3 Tables Table 1: Reconciliation of balance sheets - 5 financial accounting to regulatory scope of consolidation Table 2: Composition of regulatory capital - CRD 5 IV transitional basis Table 3: Reconciliation of regulatory capital from 7 transitional basis to an estimated CRD IV end point basis Table 4: Credit risk exposure - by exposure class 9 Table 5: Credit risk exposure - by region 10 Table 6: Credit risk exposure - by industry sector 11 Table 7: Credit risk exposure - by residual maturity 13 Table 8: Specialised lending - by credit rating 14 category Table 9: IRB expected loss and impairment by 14 exposure class Table 10: IRB expected loss and impairment by 15 region Table 11: IRB exposure - credit risk mitigation 16 Table 12: Standardised exposure - credit risk 17 mitigation Table 13: Counterparty credit risk exposure - by 18 exposure class and product Table 14: Market risk capital requirements 19 Table 15: Operational risk capital requirements 19 Table 16: Remuneration - aggregate 22 remuneration expenditure Table 17: Remuneration - fixed and variable 23 amounts Table 18: Remuneration - deferred remuneration 23 Table 19: Remuneration - sign-on and severance 23 payments Table 20: Remuneration - MRT remuneration by 24 band Table 21: Transitional own funds disclosure 26 Introduction The bank is a wholly owned subsidiary of HSBC Holdings plc. HSBC is one of the largest banking and financial services organisations in the world, with a market capitalisation of US$ 182 billion at 31 December The group provides a comprehensive range of banking and related financial services and divides its activities into four business segments: Retail Banking, Commercial Banking, Global Banking and Markets, and Global Private Banking. Further details of the group s principal activities can be found on page 2 of the HSBC Bank plc Annual Report and Accounts 2014 ( HSBC Bank 2014 Accounts ). Regulatory framework for disclosures HSBC is supervised on a consolidated basis in the UK by the Prudential Regulatory Authority ( PRA ). As the PRA supervises HSBC on a consolidated basis, it receives information on the capital adequacy of, and sets capital requirements for, the Group as a whole. Individual banking subsidiaries are directly regulated by their local banking supervisors, including the PRA itself in certain circumstances (for example, the bank), who set and monitor local capital adequacy requirements. In most jurisdictions, non-banking financial institutions are also subject to the supervision and capital requirements of local regulatory authorities. At consolidated Group and bank level, capital was calculated for prudential regulatory reporting purposes throughout 2014 using the Basel III framework of the Basel Committee on Banking Supervision ( Basel Committee ) as implemented by the European Union ( EU ) in the amended Capital Requirements Directive, known as CRD IV, and in the PRA s Rulebook for the UK banking industry. The PRA s final rules deployed available national discretion in order to accelerate significantly the transition timetable to full end point CRD IV compliance. Notwithstanding this, and other major developments in regulation during 2014, important elements of the capital adequacy framework in the UK have yet to be clarified, so that uncertainties remain as to the amount of capital that banks will be required to hold. These include the quantification and interaction of capital buffers, Total Loss Absorbing Capital ( TLAC ) and the impact of structural reform. In addition, various technical standards and guidelines remain to be issued by the European Banking Authority ( EBA ), requiring adoption by the European Commission to come legally into force. Regulatory developments Capital buffers CRD IV establishes a number of capital buffers, to be met by CET1 capital, broadly aligned with the Basel III framework. CRD IV contemplates that these will be phased in from 1 January 2016, subject to national 2

4 discretion. Restrictions on distributions apply where a bank fails to meet some of these buffers. Countercyclical capital buffer (CCB) The CCB is expected to be set in the rage of 0-2.5% of relevant credit exposures, although it is uncapped. In June 2014, the Financial Policy Committee ( FPC ) set the CCB rate for UK exposures at 0%. At its September 2014 meeting, the FPC left the CCB rate for UK exposures unchanged at 0% and recognised the 1% CCB rates introduced by Norway and Sweden to become effective from 3 October Buffer for other systemically important institutions ( O- SIIs ) The PRA will be responsible for identifying O-SIIs from 1 January It intends to consult on and set out its policy for identifying O-SIIs in Other regulatory developments A summary of recent and forthcoming developments in the regulation of the bank, the group and HSBC can be found: on pages of the HSBC Bank plc 2014 Accounts; on pages of the HSBC Holdings plc Annual Report and Accounts 2014 ( HSBC Holdings plc 2014 Accounts ); on pages 6-10 of the HSBC Holdings plc Pillar 3 Disclosures Pillar 3 disclosures 2014 The Basel framework is structured around three pillars : the Pillar 1 minimum capital requirements and Pillar 2 supervisory review process are complemented by Pillar 3 market discipline. Pillar 3 complements the minimum capital requirements and the supervisory review process. Its aim is to encourage market discipline by developing a set of disclosure requirements which allow market participants to assess certain specified information on: the scope of application of Basel III, capital, particular risk exposures and risk assessment processes, and hence the capital adequacy of the institution. Disclosures consist of both quantitative and qualitative information and are provided at the group level. Banks are required to disclose all their material risks as part of the Pillar 3 framework. All material and nonproprietary information required by Pillar 3 is included in the HSBC Holdings plc Pillar 3 Disclosures HSBC Bank plc, as a significant subsidiary of HSBC Holdings plc, is required to publish certain limited Pillar 3 disclosures separately on a consolidated basis. CRD IV permits certain Pillar 3 requirements to be satisfied by inclusion within a firm s financial statements. Where this is the case, this document provides page references to the relevant sections in the HSBC Bank plc 2014 Accounts and HSBC Holdings plc 2014 Accounts. Comparison with the HSBC Bank plc 2014 Accounts The Pillar 3 Disclosures 2014 have been prepared in accordance with regulatory capital adequacy concepts and rules, rather than in accordance with International Financial Reporting Standards ( IFRS ). Therefore, some information in the Pillar 3 Disclosures 2014 is not directly comparable with the financial information in the HSBC Bank plc 2014 Accounts. This is most pronounced for the credit risk disclosures, where credit exposure is defined as the amount estimated to be at risk under specified Basel III parameters. This differs from similar information in the HSBC Bank plc 2014 Accounts, which is mainly reported at the balance sheet date and therefore does not reflect the likelihood of future drawings of committed credit lines. Capital and Risk Capital management A description of the bank s approach to capital management can be found on pages of the HSBC Bank plc 2014 Accounts. Pillar 1 Pillar 1 covers the capital resources requirements for credit risk, market risk and operational risk. Credit risk includes counterparty credit risk and securitisation requirements. These requirements are expressed in terms of RWA. The table below sets out the Pillar 1 risk categories, their approaches available for calculating capital requirements and the approaches adopted by the group. 3

5 Risk category Scope of permissible approaches Approach adopted by HSBC Credit risk The Basel framework applies three approaches of increasing sophistication to the calculation of Pillar 1 credit risk capital requirements. The most basic level, the standardised approach, requires banks to use external credit ratings to determine the risk weightings applied to rated counterparties. Other counterparties are grouped into broad categories and standardised risk weightings are applied to these categories. The next level, the IRB foundation approach, allows banks to calculate their credit risk capital requirements on the basis of their internal assessment of counterparty s probability of default ( PD ), but subjects their quantified estimates of exposure at default ( EAD ) and loss given default ( LGD ) to standard supervisory parameters. Finally, the internal ratings-based ( IRB ) advanced approach allows banks to use their own internal assessment in both determining PD and quantifying EAD and LGD. Counterparty credit risk Equity Securitisation Market risk Operational risk Three methods to calculating counterparty credit risk and determining exposure values are defined by Basel: standardised, mark-to-market and internal model method ( IMM ). These exposure values are used to determine capital requirements under one of the credit risk approaches: standardised, IRB foundation and IRB advanced. Equity exposures can be assessed under standardised or IRB approaches. Basel specifies two methods for calculating credit risk requirements for securitisation positions in the nontrading book: the standardised approach and the IRB approach, which incorporates the Ratings Based Method ( RBM ), the Internal Assessment Approach ( IAA ) and the Supervisory Formula Method ( SFM ). Market risk capital requirements can be determined under either the standard rules or the internal models approach. The latter involves the use of internal value at risk ( VAR ) models to measure market risks and determine the appropriate capital requirement. The incremental risk charge ( IRC ) also applies. Basel allows for firms to calculate their operational risk capital requirement under the basic indicator approach, the standardised approach or the advanced measurement approach. For consolidated group reporting, we have adopted the IRB advanced approach for the majority of our business. Certain portfolios remain on the standardised or foundation approaches: pending the issuance of local regulations or model approval: following supervisory prescription of a nonadvanced approach; or under exemptions from IRB treatment. We use the mark-to-market and IMM approaches for counterparty credit risk. Details of the IMM permission we have received from the PRA can be found in the Financial Services Register on the PRA website. Our aim is to increase the proportion of positions on IMM over time. For group reporting purposes all equity exposures are treated under the standardised approach. For the majority of the securitisation non-trading book positions we use the IRB approach, and within this principally the RBM, with lesser amounts on IAA and SFM. Securitisation positions in the trading book are treated within Market Risk, using PRA standardised rules. The market risk capital requirement is measured using internal market risk models, where approved by the PRA, or the PRA standard rules. Our internal market risk models comprise VAR, stressed VAR and IRC. Nonproprietary details of the scope of our IMA permission are available in the Financial Services Register on the PRA website. We are in compliance with the requirements set out in Articles 104 and 105 of the Capital Requirements Regulation. We have historically adopted and currently use the standardised approach in determining our operational risk capital requirement. We are in the process of developing and implementing an AMA-compliant model, which we will use for economic capital calculation. Our medium-term aim is to move to an AMA approach for our operational risk capital requirement calculation. Consolidation basis The basis of consolidation for financial accounting purposes is described in Note 1 - Basis of preparation of the notes on the financial statements on page 113 of the HSBC Bank plc 2014 Accounts. This differs from that used for regulatory purposes. Investments in banking associates are equity accounted in the financial accounting consolidation, whereas their exposures are proportionally consolidated for regulatory purposes. Subsidiaries and associates engaged in insurance and non-financial activities are excluded from the regulatory consolidation and are deducted from regulatory capital subject to thresholds. The regulatory consolidation does not include Special Purpose Entities ( SPEs ) where significant risk has been transferred to third parties. Exposures to these SPEs are risk-weighted as securitisation positions. 4

6 Table 1: Reconciliation of balance sheets financial accounting to regulatory scope of consolidation At 31 December 2014 Deconsolidation Consolidation of Accounting balance sheet of insurance/ other entities banking associates Regulatory balance sheet Ref m m m m Assets Cash and balances at central banks 42, ,939 Items in the course of collection from other banks Trading assets 130,127 1, ,340 Financial assets designated at fair value 6, ,899 Derivatives 187,736 (69) - 187,667 Loans and advances to banks 25,262 (18) 14 25,258 Loans and advances to customers, of which: 257,252 (6,862) - 250,390 - impairment allowances on IRB portfolios h 2, ,179 - impairment allowances on standardised portfolios j Reverse repurchase agreements (non-trading) 41, ,945 Financial investments 76,194 (20,657) - 55,537 Prepayments, accrued income and other assets, of which: 20,396 (1,446) 37 18,987 - goodwill and intangible assets in disposal groups held for sale g retirement benefit assets f 3, ,060 Current tax assets Interests in associates and joint ventures 69 (6) (22) 41 Goodwill and intangible assets g 7,217 (474) - 6,743 Deferred tax assets Total assets 797,289 (28,319) ,085 Liabilities and equity Liabilities Deposits by banks 27, ,677 Customer accounts 346,507 (91) - 346,416 Reverse repurchase agreements (non-trading) 23, ,353 Items in the course of transmission to other banks Trading liabilities 82,600 (30) - 82,570 Financial liabilities designated at fair value, of which: 22, ,552 - other instruments disallowed in tier 1 capital i term subordinated debt included in tier 2 capital l 2, ,503 Derivatives 188, ,295 Debt securities in issue 27,921 (6,262) - 21,659 Accruals, deferred income and other liabilities, of which: 12,417 (3,589) 23 8,851 - retirement benefit liabilities f 333 (1) contingent liabilities and contractual commitments, of which: - credit-related provisions on IRB portfolios h credit-related provisions on standardised portfolios j Current tax liabilities 255 (50) Liabilities under insurance contracts issued 17,522 (17,522) - - Provisions 1,707 (16) 4 1,695 Deferred tax liabilities Subordinated liabilities, of which: 8, ,858 - other instruments disallowed in tier 1 capital i 1, ,402 - perpetual subordinated debt included in tier 2 capital k 2, ,841 - term subordinated debt included in tier 2 capital l 3, ,284 Total liabilities 760,591 (27,543) ,163 Equity Called up share capital Share premium account, of which: 20, ,733 - preference share premium disallowed in tier 1 capital b Other equity instruments 2, ,196 Other reserves Retained earnings a 11,580 (776) - 10,804 Total equity attributable to the shareholders of the parent company a 36,078 (776) - 35,302 Non-controlling interests, of which: c preference shares issued by subsidiaries disallowed in tier 1 capital d surplus non-controlling interest disallowed in CET 1 e Total equity 36,698 (776) - 35,922 Total equity and liabilities 797,289 (28,319) ,085 5

7 1. The references (a) (l) identify balance sheet components which are used in the calculation of regulatory capital on page 6. Regulatory capital Table 2 below sets out the composition of the group s regulatory capital and risk-weighted assets at 31 December Table 2: Composition of regulatory capital CRD IV transitional basis CRD IV year 1 transition Basel 2.5 At 31 December 2014 At 31 December 2013 Ref m m Tier 1 capital Shareholders equity 1 34,562 31,993 Shareholders equity per balance sheet a 36,079 32,370 Foreseeable interim dividend (315) - Preference share premium b (431) (431) Deconsolidation of special purpose entities 2 a (86) 53 Deconsolidation of insurance entities a (685) 1 Non-controlling interests Non-controlling interests per balance sheet c Preference share non-controlling interests d (150) (150) Surplus non-controlling interest excluded from CET 1 e (117) - Regulatory adjustments to the accounting basis (5,444) (1,389) Unrealised gains/(losses) on available-for-sale debt and equities 3 (837) (656) Own credit spread Debit valuation adjustment (88) - Defined benefit pension fund adjustment 4 f (2,400) (946) Cash flow hedging reserve (163) 13 Reserves arising from revaluation of property - (16) Other equity instruments (2,195) - Other regulatory adjustments (6) (2) Deductions (8,380) (8,565) Goodwill and intangible assets g (6,822) (7,218) Deferred tax assets that rely on future profitability (excluding temporary differences) (21) - Additional valuation adjustment (referred to as PVA) (588) - 50% of securitization positions - (902) 50% of excess of expected losses over impairment allowances h - (477) 50% of tax credit adjustment for expected losses - 32 Excess of expected losses over impairment allowances h (949) - Common equity tier 1 21,091 22,438 Additional tier 1 capital Other tier 1 capital before deductions 4,047 2,353 Preference shares and related premium b Other instruments i 3,583 1,772 Deductions - (683) Unconsolidated investments 5 - (715) 50% of tax credit adjustment for expected losses - 32 Tier 1 capital 25,138 24,108 Tier 2 capital Total qualifying tier 2 capital before deductions 8,628 11,582 Reserves arising from revaluation of property and unrealised gains in available-for-sale equities Collective impairment allowances 6 j Perpetual subordinated debt k 2,844 2,683 Term subordinated debt l 5,784 8,539 Total deductions other than from tier 1 capital (210) (2,147) Unconsolidated investments 5 (210) (715) 50% of securitisation positions - (902) 50% of excess of expected losses over impairment allowances - (477) Other deductions - (53) Total regulatory capital 33,556 33,543 6

8 CRD IV year 1 transition Basel 2.5 At 31 December 2014 At 31 December 2013 Ref m m Risk-weighted assets 243, ,879 Credit risk 168, ,459 Counterparty credit risk 30,364 16,450 Market risk 22,437 17,931 Operational risk 22,251 22,039 Capital ratios Common equity tier 1 ratio 8.7% 12.1% Tier 1 ratio 10.3% 13.0% Total capital ratio 13.8% 18.0% 1. Includes externally verified profits for the year to 31 December 2014 and the interim dividend of 315 million declared by the Board of Directors after 31 December figures exclude the dividend of 630m declared in February Mainly comprises unrealised gains on available-for-sale securities owned by deconsolidated special purpose entities. 3. Under CRD IV transitional rules, unrealised gains on available-for-sale securities must be excluded from capital resources. 4. CRD IV rules require banks to exclude from capital resources any surplus in a defined benefit pension scheme. 5. Mainly comprises investment in insurance entities. Under CRD IV rules, the value of unconsolidated investments in insurance entities in 2014 falls below the 10% threshold for deductions. 6. Under previous PRA rules, collective impairment allowances on loan portfolios under the standardised approach were allowable in tier 2 capital. Table 3: Reconciliation of regulatory capital from transitional basis to an estimated CRD IV end point basis At 31 December 2014 CET1 on year 1 transitional basis 21,091 Unrealised gains in available-for-sale reserves 837 CET1 on end point basis 21,928 AT1 on year 1 transitional basis 4,047 Grandfathered instruments (1,852) Preference share premium (345) Other instruments (1,507) AT1 on end point basis 2,195 T2 on year 1 transitional basis 8,418 Grandfathered instruments (2,326) Term subordinated debt (2,326) T2 on end point basis 6,092 Total capital on end point basis 30,215 Credit risk Overview Credit risk is the risk of financial loss if a customer or counterparty fails to meet a payment obligation under a contract. It arises principally from direct lending, trade finance and leasing business, but also from off-balance sheet products such as guarantees and credit derivatives, and from the group s holdings of debt and other securities. For credit risk, with the PRA s approval, the group has adopted the IRB advanced approach for the majority of its business, with the remainder on either IRB foundation or standardised approaches. A rollout plan is in place to extend coverage of the advanced approach over the next few years, leaving a residue of exposures on the standardised approach. The environment for approval and operation of internal risk-based ( IRB ) analytical models remains challenging. The PRA has introduced a number of measures to constrain modelling approaches used to calculate RWAs; these generally have driven higher capital requirements. These measures included a 45% floor for LGD on sovereign and bank IRB exposures and a requirement to adopt supervisory slotting for certain commercial real estate exposures. Given that the majority of European Economic Area ( EEA ) sovereign exposures are treated under the standardised approach, the sovereign LGD floor in practice applies to non-eea sovereign exposures. The PRA consulted during 2014 on a proposal (CP12/14) to remove the Advanced IRB approach permissions for a number of low default wholesale portfolios, such as Banks, Sovereigns, Public Sector Entities and Financial Sector Entities which would require firms to adopt a Foundation IRB Approach. Final rules are still awaited. 7

9 A more fundamental review of the IRB framework is expected during 2015 with the European Banking Authority mandated under the CRR to issue a number of technical standards to fix identified deficiencies in the current IRB framework. Work is also being taken forward at the International level to ensure greater consistency of calculation and reporting of IRB models. As part of the introduction of the Capital Requirements Regulation firms are required to attest on an annual basis that their risk rating system complies with the requirements of the CRR and the PRA s Supervisory Statement (SS11/13) issued in December Where a firm is unable to demonstrate full compliance they may be subject to the imposition of additional regulatory floors or required to revert to less advanced approaches for the affected portfolios. As a result of these requirements, three small portfolios reverted from an AIRB to a standardised approach in January 2014 and a further two portfolios have reverted from AIRB to FIRB in January The tables below set out details of the group s credit risk exposures by exposure class and approach. Further explanation of the group s approach to managing credit risk (including details of the group s past due and impaired exposure, and its approach to credit risk impairment) can be found: on pages of the HSBC Bank plc 2014 Accounts; on pages of the HSBC Holdings plc 2014 Accounts; on pages of the HSBC Holdings plc Pillar 3 Disclosures

10 Table 4: Credit risk exposure - by exposure class Exposure value Average exposure value RWA Capital required 1 m m m m IRB advanced approach 333, , ,014 8,000 Retail: - secured by mortgages on immovable property SME 1,550 1, secured by mortgages on immovable property non-sme 92,450 93,366 5, qualifying revolving retail 22,373 22,204 4, other SME 8,438 9,089 3, other non-sme 14,881 14,672 3, Total retail 139, ,930 17,297 1,383 Central governments and central banks 16,464 17,289 3, Institutions 18,537 20,706 7, Corporates 159, ,555 71,930 5,754 IRB foundation approach 12,268 11,087 8, Institutions Corporates 12,240 11,073 8, IRB Securitisation positions 22,406 23,217 25,675 2,054 IRB Non-credit obligation assets 6,587 6,046 3, Standardised approach 126, ,352 31,394 2,512 Central governments or central banks 79,692 87, Public sector entities International organisations 2,126 2, Institutions 10,305 10,235 2, Corporates 24,290 22,509 19,419 1,554 Retail 3,590 4,122 2, Secured by mortgages on immovable property 2,830 2,933 1, Exposures in default Items associated with particularly high risk , Collective investment undertakings Equity exposures 769 1,133 1, Other items 2 1,680 3,684 1, At 31 December , , ,600 13,487 IRB advanced approach 270, ,686 82,805 6,624 Retail: - secured by mortgages on immovable property SME secured by mortgages on immovable property non-sme 93,608 93,372 5, qualifying revolving retail 22,329 21,854 4, other SME 10,402 9,526 5, other non-sme 15,633 15,125 4, Total retail 141, ,877 20,276 1,622 Central governments and central banks 18,150 20,597 3, Institutions 12,045 20,412 4, Corporates 98,648 96,800 54,571 4,366 IRB foundation approach 10,104 9,876 5, Institutions Corporates 10,104 9,876 5, IRB Securitisation positions 24,276 25,998 11, IRB Non-credit obligation assets Standardised approach 155, ,320 29,300 2,344 Central governments or central banks 101,075 93, Public sector entities International organisations 1,176 1, Institutions 10,416 9,829 2, Corporates 23,839 31,432 14,731 1,178 Retail 4,647 4,668 3, Secured by mortgages on immovable property 3,351 4,331 1, Exposures in default Items associated with particularly high risk Collective investment undertakings Equity exposures Other items 2 9,071 10,220 5, At 31 December , , ,459 10, In this, and all following tables where the term appears, capital required is calculated as 8% of RWA. 2. Includes items such as tangible fixed assets, prepayments, deferred taxation and immaterial exposure classes under the standardised approach. 9

11 Table 5: Credit risk exposure - by region United Continental Kingdom Europe Other Total m m m m IRB advanced approach 282,522 46,287 4, ,742 Retail: - secured by mortgages on immovable property SME 26 1,524-1,550 - secured by mortgages on immovable property non-sme 90,610 1,840-92,450 - qualifying revolving retail 22, ,373 - other SME 5,690 2,748-8,438 - other non-sme 4,244 10,637-14,881 Total retail 122,942 16, ,692 Central governments and central banks 10,801 2,351 3,312 16,464 Institutions 13,475 3,442 1,620 18,537 Corporates 135,304 23, ,049 IRB foundation approach ,158-12,268 Institutions Corporates ,130-12,240 IRB Securitisation positions 20,332 2,073-22,406 IRB Non-credit obligation assets 5, ,587 Standardised approach 83,915 35,637 7, ,809 Central governments or central banks 64,516 15, ,692 Public sector entities International organisations - 2,126-2,126 Institutions 3,739 6, ,305 Corporates 12,567 7,447 4,276 24,290 Retail ,174 3,590 Secured by mortgages on immovable property 576 1, ,830 Exposures in default Items associated with particularly high risk Collective investment undertakings Equity exposures Other items 2 1, ,680 At 31 December ,332 97,099 12, ,811 IRB advanced approach 217,667 47,921 5, ,815 Retail: - secured by mortgages on immovable property SME - secured by mortgages on immovable property non-sme 91,309 2,299-93,608 - qualifying revolving retail 22, ,329 - other SME 5,966 4,436-10,402 - other non-sme 4,823 10,810-15,633 Total retail 124,416 17, ,972 Central governments and central banks 11,951 2,420 3,779 18,150 Institutions 6,818 3,779 1,448 12,045 Corporates 74,482 24,166-98,648 IRB foundation approach 168 9,936-10,104 Institutions Corporates 168 9,936-10,104 IRB Securitisation positions 22,351 1,925-24,276 IRB Non-credit obligation assets Standardised approach 105,239 41,330 8, ,224 Central governments or central banks 80,205 20, ,075 Public sector entities International organisations - 1,176-1,176 Institutions 3,751 6, ,416 Corporates 12,499 6,992 4,348 23,839 Retail 768 1,206 2,673 4,647 Secured by mortgages on immovable property 679 1, ,351 Exposures in default Items associated with particularly high risk Collective investment undertakings Equity exposures Other items 2 6,876 1, ,071 At 31 December , ,112 13, ,419 10

12 Table 6: Credit risk exposure - by industry sector Personal Manufacturing International trade and services Property and other business activities Government and public administration Other commercial Financial Noncustomer assets Total m m m m m m m m m IRB advanced approach 129,705 27,482 40,407 57,212 19,045 21,982 37, ,742 Retail: - secured by mortgages on immovable property SME , ,550 - secured by mortgages on immovable property non-sme 92, ,450 - qualifying revolving retail 22, ,373 - other SME ,484 4, , ,438 - other non-sme 14, ,881 Total retail 129, ,504 6, , ,692 Central governments and central banks ,572-3,892-16,464 Institutions ,537-18,537 Corporates 1 26,946 38,903 51,119 6,030 20,740 15, ,049 IRB foundation approach 145 5,017 2, ,433 1,732-12,268 Institutions Corporates 145 5,017 2, ,433 1,704-12,240 IRB Securitisation positions ,406-22,406 IRB Non-credit obligation assets ,587 6,587 Standardised approach 7,029 6,005 3,657 2,724 36,229 2,604 67, ,809 Central governments or central banks ,501-46, ,692 Public sector entities International organisations , ,126 Institutions ,305-10,305 Corporates 1,117 5,721 3,464 2, ,313 9,038-24,290 Retail 2, ,590 Secured by mortgages on immovable property 2, ,830 Exposures in default Items associated with particularly high risk Collective investment undertakings Equity exposures Other items , ,680 At 31 December ,879 38,504 47,016 60,673 55,526 26, ,805 7, ,811 11

13 Personal Manufacturing International trade and services Property and other business activities Government and public administration Other commercial Financial Non-customer assets Total m m m m m m m m m IRB advanced approach 132,214 17,914 19,048 41,479 17,102 15,800 27, ,815 Retail: - secured by mortgages on immovable property SME secured by mortgages on immovable property non-sme 93, ,608 - qualifying revolving retail 22, ,329 - other SME , ,402 - other non-sme 15, ,633 Total retail 131, , ,972 Central governments and central banks ,892-5,258-18,150 Institutions ,955-12,045 Corporates ,406 18,169 33,308 3,957 15,370 9,794-98,648 IRB foundation approach 19 4,445 2, ,522-10,104 Institutions Corporates 19 4,445 2, ,522-10,104 IRB Securitisation positions , ,276 IRB Non-credit obligation assets Standardised approach 7,379 5,488 3,401 1,883 32,445 3,436 96,823 4, ,224 Central governments or central banks ,556-70, ,075 Public sector entities International organisations , ,176 Institutions , ,416 Corporates 159 5,155 3,199 1, ,256 10,038-23,839 Retail 3, ,647 Secured by mortgages on immovable property 3, ,351 Exposures in default Items associated with particularly high risk Collective investment undertakings Equity exposures Other items ,703 4,366 9,071 At 31 December ,612 27,847 25,145 43,806 49,716 20, ,784 4, ,419 12

14 Table 7: Credit risk exposure - by residual maturity Less than 1 year Between 1 and 5 years More than 5 years Undated Total m m m m m IRB advanced approach 127,803 84, , ,742 Retail: - secured by mortgages on immovable property SME ,406-1,550 - secured by mortgages on immovable property non-sme 1,574 1,481 89,395-92,450 - qualifying revolving retail 22, ,373 - other SME 1,779 4,384 2,275-8,438 - other non-sme 860 4,710 9,311-14,881 Total retail 26,613 10, , ,692 Central governments and central banks 6,359 6,831 3,274-16,464 Institutions 12,255 5, ,537 Corporates 82,576 61,252 15, ,049 IRB foundation approach 5,008 6, ,268 Institutions Corporates 4,980 6, ,240 IRB Securitisation positions 5,862 2,868 13,676-22,406 IRB Non-credit obligation assets ,587 6,587 Standardised approach 78,021 30,343 16,837 1, ,809 Central governments or central banks 46,245 21,817 11,630-79,692 Public sector entities International organisations 183 1, ,126 Institutions 10, ,305 Corporates 18,143 4,899 1,248-24,290 Retail 1,712 1, ,590 Secured by mortgages on immovable property ,225-2,830 Exposures in default Items associated with particularly high risk Collective investment undertakings Equity exposures Other items ,680 At 31 December , , ,166 8, ,811 IRB advanced approach 73,676 79, , ,815 Retail: - secured by mortgages on immovable property SME secured by mortgages on immovable property non-sme 1,426 1,859 90,323-93,608 - qualifying revolving retail 22, ,329 - other SME 1,987 5,159 3,256-10,402 - other non-sme 1,082 5,349 9,202-15,633 Total retail 26,803 12, , ,972 Central governments and central banks 9,137 7,116 1,897-18,150 Institutions 6,221 5, ,045 Corporates 31,515 54,572 12,561-98,648 IRB foundation approach 4,207 5, ,104 Institutions Corporates 4,207 5, ,104 IRB Securitisation positions ,351 1,925 24,276 IRB Non-credit obligation assets Standardised approach 94,758 36,491 13,734 10, ,224 Central governments or central banks 67,912 24,347 8, ,075 Public sector entities International organisations - 1, ,176 Institutions 8,418 1, ,416 Corporates 16,529 4,894 2,416-23,839 Retail 1,425 3, ,647 Secured by mortgages on immovable property ,146-3,351 Exposures in default Items associated with particularly high risk Collective investment undertakings Equity exposures Other items ,025 9,071 At 31 December , , ,435 12, ,419 13

15 Specialised lending The table below sets out the specialised lending exposures by credit rating category. Specialised lending relates to financing of individual projects where repayment is dependent on the performance of the underlying assets or collateral. The group aligns exposures to specialised lending categories by taking into account the financial strength of the project, political and legal environment, asset characteristics, strength of the sponsor and developer. Table 8: Specialised lending by credit rating category At 31 December 2014 Exposure At 31 December 2013 m m Category 1 - strong 6,447 4,663 Category 2 - good 4,255 4,721 Category 3 - satisfactory 1,686 2,554 Category 4 - weak Category 5 - default 978 1,215 14,074 13,817 Table 9: IRB expected loss and impairment by exposure class Expected loss at 31 December Allowances at 31 December Impairment Charge for the year 1 m m m IRB exposure classes Central governments and central banks Institutions Corporates 1,893 1, Retail: 1, secured by mortgages on immovable property SME secured by mortgages on immovable property non-sme (51) - qualifying revolving retail (5) - other SME other non-sme ,077 2, IRB exposure classes Central governments and central banks Institutions Corporates 2,239 1, Retail: 1,254 1, secured by mortgages on immovable property SME secured by mortgages on immovable property non-sme (21) - qualifying revolving retail other SME other non-sme ,595 2, Details of amounts written off and recoveries taken straight to the income statement can be found in the tables on page 51 of the HSBC Bank plc 2014 Accounts. 14

16 Table 10: IRB expected loss and impairment by region Expected loss at 31 December Allowances at 31 December Impairment Charge for the year m m m United Kingdom 2,347 1, Continental Europe Other ,077 2, United Kingdom 2,836 2, Continental Europe Other ,595 2, Credit risk mitigation ( CRM ) Mitigation of credit risk is a key aspect of effective risk management. Specific, detailed policies cover the acceptability, structuring and terms of various types of business with regard to the availability of credit risk mitigation, for example in the form of collateral security. These policies, together with the setting of suitable valuation parameters, are subject to regular review to ensure that they are supported by empirical evidence and continue to fulfil their intended purpose. Collateral The most common method of mitigating credit risk is to take collateral. In our retail residential and CRE businesses, a mortgage over the property is usually taken to help secure claims. Physical collateral is also taken in various forms of specialised lending and leasing transactions where income from the physical assets that are financed is also the principal source of facility repayment. In the commercial and industrial sectors, charges are created over business assets such as premises, stock and debtors. Loans to private banking clients may be made against a pledge of eligible marketable securities, cash or real estate. Facilities to SMEs are commonly granted against guarantees given by their owners and/or directors. Guarantees may be taken from third parties where the group extends facilities without the benefit of any alternative form of security, e.g. where it issues a bid or performance bond in favour of a non-customer at the request of another bank. Further information regarding collateral held over residential and CRE property is provided on page 146 of the HSBC Holdings plc 2014 Accounts. Financial collateral In the institutional sector, trading facilities are supported by charges over financial instruments such as cash, debt securities and equities. Financial collateral in the form of marketable securities is used in much of the group s over-the-counter ( OTC ) derivatives activities and in securities financing transactions ( SFT s) such as repos, reverse repos, securities lending and borrowing. Netting is used extensively and is a prominent feature of market standard documentation. In the banking book we provide customers with working capital management products. Some of these products have loans and advances to customers and customer accounts where we have rights of offset and comply with the regulatory requirements for on balance sheet netting. Under on-balance sheet netting, the customer accounts are treated as cash collateral and the effects of this collateral are incorporated in our LGD estimates. For risk management purposes, the net exposures are subject to limits which are monitored and the relevant customer agreements are subject to review and update, as necessary, to ensure the legal right of offset remains appropriate. Other forms of CRM Our Global Banking and Markets business utilises credit risk mitigation to manage the credit risk of its portfolios, with the goal of reducing concentrations in individual names, sectors or portfolios. The techniques in use include credit default swap ( CDS ) purchases, structured credit notes and securitisation structures. Buying credit protection creates credit exposure against the protection provider, which is monitored as part of the overall credit exposure to them. Where applicable the transaction is entered into directly with a central clearing house counterparty, otherwise our exposure to CDS protection providers is diversified among mainly banking counterparties with strong credit ratings. Further information on our use of CDS mitigants can be found on page 149 of the HSBC Holdings plc 2014 Accounts. Policy and procedures Policies and procedures govern the protection of our position from the outset of a customer relationship, for instance in requiring standard terms and conditions or specifically agreed documentation permitting the offset of credit balances against debt obligations, and through controls over the integrity, current valuation and, if necessary, realisation of collateral security. Valuing collateral Valuation strategies are established to monitor collateral mitigants to ensure that they continue to provide the anticipated secure secondary repayment source. Market trading activities such as collateralised OTC derivatives and SFTs typically include daily 15

17 valuations in support of margining arrangements. In the residential mortgage business, Group policy prescribes revaluation at intervals of up to three years, or more frequently where market conditions are subject to significant change. Residential property collateral values are determined through a combination of professional appraisals, house price indices or statistical analysis. Local market conditions determine the frequency of valuation for CRE. Revaluations are sought where, for example, as part of the regular credit assessment of the obligor, material concerns arise in relation to the performance of the collateral. CRE revaluation also commonly occurs where a decline in the obligor s credit quality gives cause for concern that the principal payment source may not fully meet the obligation. Recognition of risk mitigation under the IRB approach Within an IRB approach, risk mitigants are considered in two broad categories: first, those which reduce the intrinsic PD of an obligor; and second, those which affect the estimated recoverability of obligations and thus LGD. The first typically include full parental guarantees where one obligor within a group of companies guarantees another. This is usually factored into the estimate of the latter s PD, as it is expected that the guarantor will intervene to prevent a default. PD estimates are also subject to a sovereign ceiling, constraining the risk ratings assigned to obligors in higher risk countries if only partial parental support exists. In certain jurisdictions, typically those on the Foundation IRB approach, certain types of third party guarantee are also recognised through substitution of the obligor s PD by the guarantor s PD. In the second category, LGD estimates are affected by a wider range of collateral including cash, charges over real estate property, fixed assets, trade goods, receivables and floating charges such as mortgage debentures. Unfunded mitigants, such as third party guarantees, are also taken into consideration in LGD estimates where there is evidence that they reduce loss expectation. The main providers of guarantees are banks, other financial institutions and corporates, the latter typically in support of subsidiaries of their company group. Across HSBC, the nature of such customers and transactions is very diverse and the creditworthiness of guarantors accordingly spans a wide spectrum. The creditworthiness of providers of unfunded credit risk mitigation is taken into consideration as part of the guarantor s risk profile when, for example, assessing the risk of other exposures such as direct lending to the guarantor. Internal limits for such contingent exposure are approved in the same way as direct exposures. EAD and LGD values, in the case of individually assessed exposures, are determined by reference to regionally approved internal risk parameters based on the nature of the exposure. For retail portfolios, credit risk mitigation data is incorporated into the internal risk parameters for exposures and feeds into the calculation of the EL band value summarising both customer delinquency and product or facility risk. Credit and credit risk mitigation data form inputs submitted by all Group offices to centralised databases and processing, including performance of calculations to apply the relevant CRD IV rules and approach,. A range of collateral recognition approaches are applied to IRB capital treatments: unfunded protection, which includes credit derivatives and guarantees, is reflected through adjustment or determination of PD or LGD; eligible financial collateral is taken into account in LGD models (under Advanced IRB) or by adjusting regulatory LGD values (under Foundation IRB). The adjustment to LGD is based on the degree to which the exposure value would be adjusted if the Financial Collateral Comprehensive Method ( FCCM ) were applied; and for all other types of collateral, including real estate, the LGD for exposures calculated under the IRB advanced approach is calculated by models. For IRB foundation, base regulatory LGDs are adjusted depending on the value and type of the asset taken as collateral relative to the exposure. The types of eligible mitigant recognised under the IRB foundation approach are more limited. The table below sets out, for IRB exposures, the exposure value and the effective value of credit risk mitigation expressed as the exposure value covered by the credit risk mitigant. Further information on credit risk mitigation may be found on pages of the HSBC Holdings plc 2014 Accounts. 16